Effects of tariff changes on transfer prices
The arrival of the new US administration signalled a major turning point in the US approach to international trade. The first months suggest a possible shift away from liberalisation, with tariffs being used to advance US trade interests. For Czech companies that are part of multinational groups, this means not only higher costs but also complex tax challenges in the transfer pricing area.
Transfer pricing determines at what prices companies belonging to the same multinational group sell goods and services to each other. The price at which a Czech firm sells goods to its US subsidiary will determine in which country the group will generate profit and how much it will pay in taxes. The rules require these prices to be arm's length, i.e., they must be the same as if they had been negotiated between independent parties.
How tariffs change the game
According to the UN, the volume of international trade reached approximately USD 33 trillion in 2024, of which 60 to 80 percent was trade between related parties – i.e. transactions to which transfer pricing rules apply. The imposition of a 10% tariff on US imports therefore affects a huge part of world trade.
If the US imposes tariffs on imports, someone will have to pay for them. The question is who – the manufacturer in the Czech Republic, the distributor in the US, or the end customer? Companies use various short-term strategies, each of which has its own specific impact on transfer prices.
Strategy 1: Lower the transfer price
The first strategy is the Czech manufacturer lowering the price at which they sell goods to their American subsidiary. A lower price means a lower base for calculating any customs duties. However, if the Czech manufacturer only manufactures on order of the US company and has no influence on the final price, then they should be compensated for the loss arising from the price reduction. Otherwise, the Czech tax administration may accuse them of acting at the instruction of the parent company and not independently. If, on the other hand, the Czech company makes decisions about the group's strategy, they can compensate themselves for the reduced margin by means of royalties/ licence fees or dividend payments. However, there is a risk that the US tax authorities may consider such actions abusive reductions of tariffs.
Strategy 2: Suspend or limit production
The Czech company may temporarily reduce production and wait to see how the trade negotiations between governments turn out. From a tax perspective, it will be crucial to prove that the Czech company made this decision independently, based on its own business judgment. However, there is a risk that the tax administration will challenge the independence of the decision and claim that the company acted upon the instruction of the foreign parent company. Therefore, it is important to have detailed records of meetings, email communications and other documentation proving that the decision was indeed independent and that any losses from suspending or limiting production will be borne by the Czech company.
Strategy 3: Redirect production
If a multinational group has production facilities in different countries, they can redirect supplies to the US so that they arrive from countries with lower tariffs. Instead of importing from the Czech Republic (10% duty), they can supply from another country where the duty is lower or none. This strategy may cause problems for the Czech manufacturer whose orders will thus drop. If the drop in orders was not their decision and has led to a decrease in profitability, the tax administration may demand that their profitability be compensated in some way.
A special case is a situation where a Czech company continues to produce, with the goods being merely repackaged in another country with a lower tariff and then sent to the US. In this case, attention must be paid to the customs regulations regarding the origin of goods.
What's next?
The 90-day suspension of tariffs for selected trading partners expires at the beginning of July. Will the tariffs then be permanent, or will a further reduction be negotiated? Current strategies offer only temporary solutions that may prove unsuitable in the future.
The short-term responses described above are just the tip of the iceberg. In subsequent articles, we will therefore look into some deeper questions: Why do tariffs make the whole transfer pricing system so complicated? What are the risks in tax inspections? And how might the whole situation evolve in the long run? Only a comprehensive understanding of all aspects will allow companies to effectively navigate the new environment affected by tariff wars.